Brave New Life: Understand The Marginal Utility of Money

Today I have the rare opportunity to share a guest posting from my Southern Colorado friend who runs the Brave New Life blog. Brave, as I like to refer to him, is a family man with two children. And he is about 477 days away from beginning his own early retirement. His blog offers wise perspectives on lifestyle and philosophy from a man who only recently made the switch to running an efficient and frugal life. He also has the unique trait of ridiculous dedication to mastering tasks, having gone through stages of extreme career dedication and ultramarathon running. Now he has turned his attention to early retirement with the twist of acquiring very advanced investment knowledge as a side hobby.

Core Principle #5: Understand The Marginal Utility of Money

This post is part 5 of an ongoing 8-part series. The series is presenting 8 fundamental principles of what I’ve been referring to as a Brave New Life. Each step builds upon and supports the other steps, so I would encourage you to start from the beginning, preferably before you continue with this post.

When Mr. Money Mustache asked me if I’d like to present one of my core principles on MMM, I have to admit that I was both excited and intimidated. It’s like Michael Jordan just asked me to sub for him, and I’ve got thousands of people watching me with very high expectations. So before I begin, let me warn you that I lack the fun, arrogant wit and charm of the great Mr. Money Mustache, but I’ll do my best to step it up. Also, I’ll probably fail to sprinkle in the swearing that you’ve all come to expect here…

The Marginal Utility Of Money

I’m here today to show you that money does not correlate linearly with happiness (not even close), and that recognizing this fact can be a powerful tool. In order to understand this, you simply need to consider the “marginal utility” of money. Understanding the concept of marginal utility is nothing complicated, but it’s something the average person refuses to consider. Luckily, you guys aren’t average people, you’re Mustacheans!

Marginal utility of money is the amount of value (happiness) gained from an increase amount of money available to you. This value changes depending on how much you already have stache’d away. Put another way, the value I get from saving an extra dollar means a lot more than to a billionaire.

Since the goal of the brave new life is peace of mind and joyfulness, let’s go ahead and look at the completely non-scientific correlation between money earned and saved and the joy it brings.

Everybody’s chart is different, but it will look something like this:

Point A is the point in which you have enough for the basic necessities of life: food, water, and shelter. Since you’re reading this post on a computer, I’ll assume you already have food, water, and shelter available to you. And since you already have these, you already have access to most of the joy that money can buy. That’s an important thing to understand – you already have most of the joy that money will ever buy for you.

Point B is the point at which you have enough for more of the luxuries we have in the modern world like a safe home of your own with heating and cooling, a car, higher education, and maybe a homemade bread maker. Once again, it’s up to you to define what you consider Point B.

Point C is financial independence. As you can see, it’s not that much higher than B on the happiness chart, and your overall joy will never rise significantly higher due to an increase in spending. And if your happiness won’t rise significantly higher by spending money, then why trade your valuable time to collect more of it?

OK, I get it. So now what?

Understanding the marginal utility of money is important for two reasons.

1. It forces you to realize that there’s a diminishing return in earning money.

Many people assume more money is always better, and they allow the potential for more money to be a carrot on a stick. They just keep pursuing it, never pausing to reflect on what they’re really after. It starts out with working a few hours of overtime, then 80 hours a week including weekend. Then they’re telling you how to dress. Next thing you know you’re 80 pounds overweight, divorced, and watching the news alone in the Marriot Suite’s at 6am on a Thursday, getting ready for a big sales pitch.

But once you recognize the marginal utility of money, and compare that to the marginal utility of your time, you can consciously decide to turn down money in order to gain more time – thereby regaining control of your life.

Picture the chart above, but replace “Money” with “Free Time.” The relationship between joy and free time exists, and the curve will look very similar.

I picture happiness as a cumulative thing, so in order to maximize overall happiness, you want to find the right balance between earning money and creating free time. This consideration, I suspect, is what drove MMM’s decision to retire at 30 and the reason I’ll be retiring soon at 35. Since I’m already on the flat area of the Money/Joy chart, I have very little to gain trading my time for money. Instead, I’ll achieve far more happiness by quitting my full-time job, freeing up time to spend playing with my kids and teaching them.

Here’s a real life example: I have a pretty good job, work with great people, and in general I don’t mind doing it for 20-30 hours per week (which is what I usually put in these days). But my company has this really rigid format for bonuses where they lay out specific tasks that you must do in order to get portions of your quarterly bonus. And one of the tasks this quarter is asinine. It has nothing to do with my job, and adds no value to me or the company. I despised the idea of doing it…

A basic time/money financial analysis shows that it’s about 10 hours of work for $800 worth of bonus. Not a bad return on time. But I’m past point C on the chart above, so now if I factor in my marginal utility of money, I recognize that $800 has a negligible effect on my overall happiness. I’d rather have those 10 hours to play outside with my kids, read a book, or throwing rocks at a tree. At least then I’ll be satisfied in knowing that I’m not selling my time for something I don’t support.

2. You can redefine your own marginal utility of money

The second benefit of understanding your own marginal utility of money allows you to redefine it. If you just avoid thinking about it, the evil marketing companies will be glad to define it for you. They prey on people that don’t deliberately define their value of money, but Mustacheans are too smart for that! Marketing firms would have you believe that Point A requires a car, a big mortgage, eating out at least twice per week, and obviously cable TV (so they can keep talking to you!). But now that you’ve been made aware of the real value of the money you’re earning and spending, you get to control how you define points A, B and C. Personally, I’ve been to some villages and slums in India, and there I saw what I define as point A and what I would consider below point A. These conditions don’t exist in the US and most other developed countries, which is a good thing.

Now that you realize that YOU get to define your points A, B and C – you can literally tweak your happiness. Seriously, it really works! Over the past 18 months, I’ve made serious changes to my life. I’ve downsized my house, sold my car, changed jobs (taking a lower income), moved across the country, and overall simplified my family’s life. And while I’m much happier now, I have to admit that the single biggest change to my happiness came when I redefined points B and C. I greatly reduced what I considered luxuries, and what it takes to be financially independent.

You guys are lucky, because by reading MMM you are already slowly having your definitions of points A, B and C reduced in needs and wants. But it’s not enough to sit back and let MMM and the rest of this community define these things for you, no more so than letting a marketing team define it for you. Everyone is different, and you have to deliberately define your own personal needs and wants along the Money/Happiness chart. Besides, it’s a fun exercise. And if you have a spouse or older kids, bring them into the discussion too.

Cliff’s Notes

Let’s revisit the basic concept of this post to wrap things up. Here are the key points.

The value of each dollar you make depends on how much money you already have. If you already have “enough” then it’s not worth much at all when it comes to happiness

You can define your personal value of an additional dollar

Once you have “enough” you can free up your valuable time to do things you enjoy. This might be in the form of switching from full-time to part-time work, the ability to turn down crappy work for a few extra bucks, or an early retirement like MMM

You will never have enough money to retire if you let TV commercials define your needs and wants

The Brave New Life Chart

Warning: If you didn’t go back and read the previous posts in this series, this chart may look a bit confusing and overly complicated. With each principle I present, I try to show how it fits visually into the brave new life.

As seen in the chart below, the idea of understanding and defining your marginal utility of money has two direct paths to happiness. First, it allows you to more quickly achieve financial independence by giving you the opportunity to define how much money you really need. Second, because you will be less likely to do work just for money, it frees up your time to do things you truly enjoy.

As it turns out, there are quite a few interesting academic studies regarding the utility of money. The best one i’ve seen was done by a University of Pennsylvania economist named Justin Wolfers. He posited (and backed up) that the actual curve of happiness relating to money is logarithmic; it doesn’t just top out (not asymptotic), but continues going up at a greatly reduced rate the more money you make.

You may want to check his work out if this is something you’re interested in.

When it comes to income in the corporate environment, I’ve seen studies that show happiness actually begins to not only flatten, but go down in the high ranges. The theory was that it was a combination of those jobs being high stress, and that people at a high level are usually very ambitious, see how much their superiors are making, and feel they are more qualified to make that kind of money. The latter was me 2 years ago. Then I woke up, dumped my silly “career” ambition, and broke free of the unhappiness that careerism brings.

Good stuff! Due to a sad set of circumstances (ok, death) I ended up with a moderately-sized chunk of money. Not huge, but more than I would have spleen able to save by myself considering I didn’t start saving till 40, and that was WAAAY before my MMM education began. Once that money was in the bank, my whole attitude changed but I couldn’t verbalize why. You just did that for me- I just realized I’m pretty much at point C! I’m still at my job part-time because they need me for another year or so, but I should be DONE in less than three years, before I turn 55. Too bad the interwebz weren’t around in their current state when I was in my late 20s. Things would have been much different for me. But you guys were still in grade school then. ;)

“Too bad the interwebz weren’t around in their current state when I was in my late 20s. Things would have been much different for me.”

That’s pretty much the reason for this series of posts. Over the past year, through a lot of reading and meditating, something clicked and I realized how to put all aspects of my life into harmony. So my intent was to provide that perspective to as many people as possible, so no in 2032 is saying “I wish I’d read that 20 years ago”

Second this! Here’s another “old” person who’s growing a ‘stash (I’m in my early 40s), same thing, didn’t really start saving until late 30s, and now working on MMM status. Liz, your comment gives me more motivation to stay on track. Thanks!

I think chart #1 is inaccurate. Point C (financial independence) would shoot up higher on the joy axis, at least for those for whom early retirement and FI is appropriate (including me! I semi-retired at 25, having grasped this all subconsciously very early in adulthood). It is incredibly liberating to know you don’t have to work any more. Of course, not everyone at point C would even know they are there, as we’re so indoctrinated to keep earning and not get behind, so there needs to be an awareness of one’s true financial situation in order for C to kick in on the joy axis. But for those who do know they are there, C need to be way higher than B.

As I said, the chart is unscientific. However, I don’t think there’s some sort of step-function jump in happiness when you achieve point C. First, because point C isn’t actually a point, it’s more like a region. I drew it as a point for the sake of simplifying the argument.

Second, it’s not a step-function because as you get closer to C you achieve more freedom (if you realize it). This is what some people call “F**k You” money, because it allows you to make decisions like rejecting crappy jobs, working part time, taking entrepreneurial risks, etc. You are the perfect example of this, by semi-retiring so early.

I think the only reason it would be a step function is if you all of a sudden realized you were finanicially free. For example, you have $1M in the bank, but think you need $5M to retire. Then you stumble upon MMM’s blog and say “Holy S**t, I can retire!”

(BTW – I have no idea why I’m censoring myself on MMM’s blog. Just feels funny to swear on a keyboard)

You are right in that joy would shoot up, but I think it would happen when you ACT on the fact that you are financially independent ( ie, quit your day job). So the joy spike isn’t from simply reaching the point of financial independence in dollar terms. Because like you said, many people are there or could be and don’t know it. So simply getting there in dollars isn’t going to change your daily life automatically.

But I get the point of your post, and I agree. I am going to get a HUGE joy spike when I am financially independent!

Yep, there will be a huge step in happiness when you ACT on your financial independence by quitting a full time job. And that’s exactly why I mentioned above that there is also a similar curve between free time and happiness. The step up in happiness will be due to increased free time, not because you passed some magical point in your savings.

When you’re working a full time job, you are still on the steep area of the curve, where any additional time results in significantly more happiness. When you quit, you immediately move over to the flatter area of the curve. If you don’t act, then you won’t see the step function.

Similarly, if you start working 4 days a week towards the end of your career (as MMM did) or unofficially start working about 20 hours per week (as I’ve been doing) then you start to get the benefits of the free time happiness prior to reaching point C (financial independence)

I was thinking after my last post, that also for me, C came before B. Once I had a degree of financial independence (it wasn’t total, but mortgage was paid off and I worked very little), then I could spend and enjoy a few luxuries like having a car.

But is that because the added joy of early retirement don’t come from addtional money but from addtional time which would be on another axis. When you reitire early many times you start spending less money but with more time avaliable…No?

It’s really sad to me that so many people go through life without realizing that there’s a point of diminishing returns. They keep earning more money, and spending more money. And they can’t figure out why they aren’t happy.

Great idea. I learned about marginal utility in economics but never consciously applied it to my own finances.

I am not sure where I am on the chart considering I am still in school I am still very sheltered from the struggles that other people face. But I think that my points on the graph will be defined well before I approach them so I do not look back and realize that efforts have not resulted in the increased happiness that I expected. I am going to make sure to read the rest of this series. Thanks for the introduction.

Even though I’m far from being at point C (just started “big girl” salaried work 8 months ago), I came to the realization that keeping my part-time weekend job in retail wasn’t worth it anymore. Although I love my co-workers, stand behind the products, and enjoy the tasks of the job; my weekend happiness is worth more than $8/hr. (Plus quitting will remove the desire to buy things at work, which is the weak point in my mustache.) Very nice post, and I look forward to reading the Brave New Life Blog. :)

I’m with you, Danielle. I recently sold a profitable website that I had as a side project because it just wasn’t worth the minor stresses it caused. I didn’t get a fraction of what it was probably worth, but to me it was just my way of freeing up more stress-free fun time (and more time for my blog).

great perspective here on the concept of “enough” Brave, and you’ve got some wonderful phrasing here:

“It starts out with working a few hours of overtime, then 80 hours a week including weekend. Then they’re telling you how to dress. Next thing you know you’re 80 pounds overweight, divorced, and watching the news alone in the Marriot Suite’s at 6am on a Thursday, getting ready for a big sales pitch.”

“I’d rather have those 10 hours to play outside with my kids, read a book, or throwing rocks at a tree.”

While I can’t support tree abuse, both those had me laughing out loud.

As you approach F-You money a couple of interesting things happen. 1st all those dollars you’ve stashed are busy working night and day to replicate themselves for your benefit. 2nd, for the work you do accept the dynamic of power has shifted. You now can negotiate money, time and terms from a position of strength. And this makes all the difference.

Yeah, F-You money is great. When I quit my old job last year for a lower paying job in Colorado, my previous employer offered me more money to stay. Then a promotion. I just smiled and told them they’d have to give me 14,000 foot mountains and snow to keep me in central Texas.

Then, when I took my new job, I told them I was willing to take less money if it meant little to no travel (most of my peers have to travel 2-3 times per year to China, and stay for several weeks). I don’t want to be away from my family for 6-8 weeks each year, and by recognizing I didn’t need the money, I could negotiate with them. They were shocked to hear that someone would accept less money.

Brave, I have been reading your blog alongside MMM’s for several months and am very much absorbed in the core principles articles you are currently posting. In mustachian terms, I am peach fuzz at best, but you guys are helping me to really think about some of this stuff for the first time. Money, and time, and happiness, and contentment—there is a heft and weight to these topics that no longer feels quite so abstract.

I knocked back a swap of positions where I work 5 years ago that would have got me an extra 6k a year. It would have meant staying in a workshop repairing vehicles, instead of going out driving and teaching others to drive (ATVs up to semi trailers). They thought I was crazy, but I love the driving, both on road and off road.

I have spent 35 years repairing, driving and eventually instructing students on most of this stuff, moving 10 years ago more into the instruction side(less repairs and greasiness).

Students always ask me about what 4x4s I own (I don’t own any), and I reply that I have all that they see before them to use and this sates my appetite for them.
Which in a way has saved me a small fortune in purchase, maintenance and running costs while allowing me to do what I enjoy (wife hates dirt & dust) without taking up my weekends and holiday time. In a way I suppose I have had a mini-stash all that time without knowing it, yay me.

Congrats on such a well written, concise post. MMM put the pressue on and you came through beautifully!

Your post reminds me of the chart in YMOYL and the studies that show happiness plateaus after making x amount of money. I learned this just recently when I started making about three times my former salary. I learned that more money doesn’t make one happy. I learned that I could now make about half of what my former salary was and be just fine. I learned that even though I now had the ability to purchase more things or experiences I really didn’t want them.

It comes down to differentiating between external and internal happiness. I spent most of my life pursuing the former, thinking that one more possession, one more experience, one more “something” would be the key to my happiness. The limiless desires of the mind prevent that from ever happening, the previous desire is merely replaced with a new and so the cycles goes. Internal happiness is a different character and one I am just beginning to become familiar with. It is better compared to the Greek term eudaimonia. This is commonly thought of as merely being the same thing as happiness, but it goes beyond the tendency to couple happiness with emotion. Eudaimonia is much more than just “feeling” happy, its away of living ones life in a good way, independent of emotion.

I am remembering the curve you talk about Mike in YMOYL, but when I did the audio course by the same name, Joe Dominguez had drawn a similar upward curve (in the written materials) with a mirror image of it coming down in the same fashion. I believe that there was some reference to this parabola looking like a gravestone. I believe that the message was chasing a higher salary only to attempt to increase one’s happiness will make you dead (however, there might be a beautiful marble gravestone to decorate your final resting place). This really stuck with me!

I believe that retiring has given me the freedom to not worry that much about money and increasing any salary I might get and that so many other possibilities and opportunities have opened up for me! BTW, I followed the method put forth in YMOYL to do this.

While I agree that, with wisdom, income does translate into wealth, the idea that wealth and income are the same thing is a dangerous one to spread without a lot of qualifiers.

Wealth = Income * Savings rate * Time * Interest

People can have extremely high incomes and still be quite poor.

The thing you have noted is that the Joy-Money graph is important for figuring out how much retirement income you need. If you realize that more discretionary spending does not lead to more happiness past “Point B”, it will mean retiring a lot sooner than your advisers would have you believe.

Knowing your personal marginal utility of money helps even after Early retirement. By not chasing returns blindly, it allows you to reduce the risk in your portfolio, and gives you more security and peace of mind.

I remember and live by my diminishing returns principles that I learned in economics classes. I got an engineering degree but use my economics knowledge just as much.

But this might be a basic principle–this logarithm thing….

We create a huge standard of living for ourselves but it’s not enough, Now we need to double it to get a little more fun out of it.

Seems everyone has to double their spending to get something out of it. Really rich people need to double their $100 million to get a little more fun.

Drug addicts need to double their dose to get a little more fun too.

But I think the key is to reset. Go back to zero rather than try to outperform the recent history. Go suffer a little. Sober up. Get on the wagon. Live the life before it was all good so that the marginal utility is not a huge thing–it’s a small one.

Maybe that is why some of us have an urge to go to the wilderness and suffer, or run marathons or whatever we have the urge to do that seems abnormal to living comfortably.

Hey great post! Especially thank you for the link to Paulo Coelho´s Blog – I didn´t even knwe he maintained one.

Although I`m having my basic needs met I would also expect to be able to meet those needs without having to work to be a great joy.

Still, I don´t know yet, because I´m at the start of my journey towards a big enough money-hill. Maybe if I get there I´ll nod my head and say: yes, this point C didn´t give the burst of happiness I thought it would, because I gradually eased into the region of point C. We´ll see.

Love the post for me finding that Marginal Utility of money is difficult. I really enjoy working…. yes I said it I love working and I love making money. For me that Marginal Utility is where my money can get me the things mostly adventures that I want the most. Now to automate my money so that I have enough for the adventures.

I was with you nearly the entire way…but the diagram? That was just too much ‘corporate’ speak/demo/illustration there. I think many of us could learn to live w/o another diagram summarizing life’s (or corporate strategy) concepts.

1. This is post #5 in the series, and a lot of the questions I received in the first 2-3 posts begged for a visual. There are different types of learners, and some rely on visuals. Have you read from the beginning? I think it helps show the progression.

2. The graphic is a setup for a closure post. (Your making me show my hand before I wanted to!). There are a few basic actions I’ve taken, along with others like MMM, ERE, etc. that are commonly seen as “hardcore” but I believe this graphic will finally show that these actions are quite natural and harmonious with a healthy and simple life.

Hopefully you’ll come visit my blog in the next week or two to see the conclusion and agree. If not, no harm done.

I’ve been working on early retirement for a couple of years now. I had a wakeup moment when a co-worker of 20 years got sick and died within a few months and never had a chance to retire even though he was 64 at the time. I’m in government and I’m surrounded by co-workers who already have plenty of money to retire but keep coming in chasing the “80%”. At some point our pension peaks at 80% of our pay (depending on age and how many years you’ve put into the system). In a few months I’ll turn 50 and qualify for 20% and I’m saving like a squirrel to add to that and get out. My friends at work think I’m nuts! They would have never turned down the offer you did in TX. But I totally get it. Great choice.

At one point ERE wrote on his post about not talking to co-workers about his ERE goal because he knew they wouldn’t be receptive. Any other thoughts on the co-worker experiences?

I’ve had one co-worker that I told about my plans to ERE, mainly because I considered him a close friend and I had hoped to convert him. Alas, he is my age but fully intends to work into his 60’s. (I did, however, get him to put $10K into a brokerage account rather than keeping all his money in a savings account earning less than inflation).

In general, I don’t talk to coworkers about my ERE goal. If I were 50, maybe. But I’m 33, and I’m the second youngest person in my office, surrounded by mostly grey-haired old men. I can’t see how talking to them about early retirement could go well. :)

Actually, this series of posts can also be helpful in avoiding to talk about ERE with co-workers, if you don’t want to, because it shows that most decisions you make affect life in several ways. So you can use any of these effects to explain your logic for decisions.

For example, In order to accomplish my goal, I have made decisions that you can’t avoid talking about – like not having a car and riding my bike to work. I recognize that not owning a car is way too “frugal” for my coworkers to understand and accept, so I never mention that. Instead, I mention that its great exercise, saves me time because then I don’t need to do cardio at the gym, and it’s better for the environment.

Then, in order to not-so-subtly also mention the financial benefits, whenever someone is complaining about the cost for new brakes on their truck, I happily mention that my brakes cost me $17 for a complete overhaul. :)

I’m digging the overall series on the Brave New Life. This post is an important concept to grasp when considering money vs. time (free time). I suspect most people don’t realize that in order to make more money, it often results in much less free time in your life which correlates directly to a loss in happiness (at least in my case). I make great money, but have slowly come to realize it comes at the expense of free time and overall happiness. This will change later this year.

I found your post pretty insightful, however, it could’ve used a little more swearing:)

Interesting take-aways. I think a lot of people get caught up in “thinking” they need more money to be happy, but what does it really do for them? Once your basics like bills and even some comforts get taken care of, money will do little else to make you happy on a day to day basis. Happiness has to come from where you find it.

On the road to debt free including mortgage in 5 years. It seems Colorado is the place to move to for tax reasons/real estate taxes? My wife and I have talked about moving when our daughter is done in 2 years with high school. We live in Wisconsin which is a tax hell but wonder if its better elsewhere?

Colorado is pretty good, except the state income taxes are a little high compared to some states.

A friend of mine has the best deal. He works at Yellowstone National Park, in Wyoming with no state income taxes. 5 miles north is Montana, where he does his shopping with almost no spending taxes. Combine that with the beauty of Yellowstone and you can’t beat it.

Check out this website to see the income taxes Canadians pay. Federal is at the top, scroll down for Provinical rates. Remember, Alberta has all that oil money ;-) Yes we cover health care,but it is not free, our taxes cover it.

Way late on the reply, but if this gets to your email and you’re still looking for a resource to compare tax burdens in different states I have found this website (http://www.retirementliving.com/taxes-by-state) to be a very good source of information. It is focused on retirees so they pay special attention to tax treatments for pensions, retired military/government workers and the like, but they have a great list of all the significant taxes (income, sales, gas, property, inheritance/estate) one generally sees at the state level.

Thank you so much for the article. I felt like you were talking directly to me. My job used to be so much fun but unfortunately has changed. This week I am being sent 600 miles from my home to Blythe, California. I will literally, be at the Marriott up at 6 am and getting ready to drive the 100 minutes to Blythe. I will be away from my family for the week and will be missing them.

I intend to read your whole blog as soon as I finish reading all the MMM blogs. Great job and thanks. Stew

MMM, Brave New Life last posted over two years ago. 2 comments on that last post suggest that Mr Brave New Life died. Do you know if there is any truth to this? I’ve checked back into the blog many times in the hope of reading another good post.

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